CANADA UNDERGROUND ECONOMY REVISITED - UPDATE AND CRITIQUE

This paper discusses changes in Canada over the past 15 years which may have contributed to growth in underground activity. Personal income taxes net of transfers, as a share of personal income, rose from 15.2 to 19.7 per cent from 1976 to 1990, and direct and indirect taxes, as a share of GDP, from 38 to 43 per cent. The self-employed grew from 11.1 per cent of all workers in 1976 to 14.5 per cent in 1991. There has been growing concern over the efficiency of government, global competition, and growing unemployment. Some immigrant communities have grown rapidly. The globalization of markets, reflected in the rapid growth of the current account discrepancy for the world, is an additional development. Finally, the base of the federal sales tax was much extended in Canada in 1991. These factors are explored as possible contributors to relatively rapid growth in the underground economy. The paper reviews problems with approaches used to measure the underground economy, and previous Canadian estimates based on the 'monetary aggregates' approach are updated. Estimates show an increase in underground activity from 1976 to 1990, with the underground economy accounting for 15 to 20 per cent of total economic activity in 1990. The paper then discusses what we know about the effectiveness of methods for reducing underground activity.